Global Business Management (MGT380) Lecture #21: Entering foreign Markets

Learning Objectives  Explore the three basic decisions that a firm contemplating foreign expansion must make  Which market to enter  When to enter  On what scale  Review the different modes that firms use to enter a foreign market  Understand the advantages and disadvantages of each entry mode

Recap of the last lecture There are four basic strategies to compete in the international environment:  global standardization  localization  transnational  International  Strategic alliances refer to cooperative agreements between potential or actual competitors  range from formal joint ventures to short-term contractual agreements  the number of strategic alliances has exploded in recent decades

 Strategic alliances are attractive because they  facilitate entry into a foreign market; e.g., Motorola initially finds it difficult to enter in Japan- so joined Toshiba  allow firms to share the fixed costs and risks of developing new products or processes (Both above firms contributed $1 billion)  bring together complementary skills and assets that neither partner could easily develop on its own; French Thomson (core is access to EU market) and Japanese JVC(technology)  help a firm establish technological standards for the industry that will benefit the firm Partner selection A good partner  helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values  shares the firm’s vision for the purpose of the alliance  will not exploit the alliance for its own ends

2. Alliance structure  The alliance should  make it difficult to transfer technology not meant to be transferred  have contractual safeguards to guard against the risk of opportunism by a partner  allow for skills and technology swaps with equitable gains  minimize the risk of opportunism by an alliance partner 3. The manner in which the alliance is managed  Requires  interpersonal relationships between managers  learning from alliance partners  Building trust

14-6 What Are The Basic Decisions Firms Make When Expanding Globally?  Firms expanding internationally must decide 1. Which markets to enter 2. When to enter them and on what scale 3. Which entry mode to use  exporting  licensing or franchising to a company in the host nation  establishing a joint venture with a local company  establishing a new wholly owned subsidiary  acquiring an established enterprise

 When Tesco, the British grocer, initially entered the U.S. market for example, it decided to commit only to a smaller level operation. You can learn more about Tesco in the Management Focus in your text.  Recall from previous chapters that there are several methods of expanding into foreign markets including exporting, licensing or franchising to host country firms, establishing a joint venture with a local firm, and setting up a wholly owned subsidiary in the host market.  But which method is better?

14-8 What Influences The Choice Of Entry Mode?  Several factors affect the choice of entry mode including  transport costs  trade barriers  political risks  economic risks  costs  firm strategy  The optimal mode varies by situation – what makes sense for one company might not make sense for another

14-9 Which Foreign Markets Should Firms Enter?  The choice of foreign markets will depend on their long run profit potential  Favorable markets  are politically stable  have free market systems  have relatively low inflation rates  have low private sector debt  Less desirable markets  are politically unstable  have mixed or command economies  have excessive levels of borrowing  Markets are also more attractive when the product in question is not widely available and satisfies an unmet need

14-10 When Should A Firm Enter A Foreign Market?  Once attractive markets are identified, the firm must consider the timing of entry 1. Entry is early when the firm enters a foreign market before other foreign firms 2. Entry is late when the firm enters the market after firms have already established themselves in the market

14-11 Why Enter A Foreign Market Early?  First mover advantages include  the ability to pre-empt rivals by establishing a strong brand name  the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants  the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business

14-12 Why Enter A Foreign Market Late?  First mover disadvantages include  pioneering costs - arise when the foreign business system is so different from that in a firm’s home market that the firm must devote considerable time, effort and expense to learning the rules of the game the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes the costs of promoting and establishing a product offering, including the cost of educating customers. The costs include business failure costs if the firm makes major mistakes, and the costs of promoting and establishing a product offering, as well as the costs of educating consumers about the product.

14-13 On What Scale Should A Firm Enter Foreign Markets?  After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry  entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field  Firms that enter a market on a significant scale make a strategic commitment to the market - the decision has a long term impact and is difficult to reverse  small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market

14-14 Is There A “Right” Way To Enter Foreign Markets?  No, there are no “right” decisions when deciding which markets to enter, and the timing and scale of entry - just decisions that are associated with different levels of risk and reward  For example, Jollibee, a fast food company from the Philippines, managed to become a global player in the industry by differentiating its product and learning from existing companies even though it was a late entrant with limited resources.

14-15 How Can Firms Enter Foreign Markets?  These are six different ways to enter a foreign market 1. Exporting - common first step for many manufacturing firms  later, firms may switch to another mode 2. Turnkey projects - the contractor handles every detail of the project for a foreign client, including the training of operating personnel  at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation 3. Licensing - a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee  patents, inventions, formulas, processes, designs, copyrights, trademarks

14-16 How Can Firms Enter Foreign Markets? 4. Franchising - a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business  used primarily by service firms 5. Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise independent firms  most joint ventures are 50:50 partnerships 6. Wholly owned subsidiary - the firm owns 100 percent of the stock  set up a new operation  acquire an established firm

14-17 Why Choose Exporting?  Exporting is attractive because  it avoids the costs of establishing local manufacturing operations  it helps the firm achieve experience curve and location economies  Exporting is unattractive because  there may be lower-cost manufacturing locations  high transport costs and tariffs can make it uneconomical  agents in a foreign country may not act in exporter’s best interest

14-18 Why Choose A Turnkey Arrangement?  Turnkey projects are attractive because  they are a way of earning economic returns from the know- how required to assemble and run a technologically complex process  they can be less risky than conventional FDI  Turnkey projects are unattractive because  the firm has no long-term interest in the foreign country  the firm may create a competitor  if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors Remember, that by selling the process technology through the turnkey project, the firm is essentially selling its competitive advantage!

14-19 Why Choose Licensing?  Licensing is attractive because  the firm avoids development costs and risks associated with opening a foreign market  the firm avoids barriers to investment  the firm can capitalize on market opportunities without developing those applications itself  Licensing is unattractive because  the firm doesn’t have the tight control required for realizing experience curve and location economies  the firm’s ability to coordinate strategic moves across countries is limited  proprietary (or intangible) assets could be lost to reduce this risk, firms can use cross-licensing agreements

14-20 Why Choose Franchising?  Franchising is attractive because  it avoids the costs and risks of opening up a foreign market  firms can quickly build a global presence  Franchising is unattractive because  it inhibits the firm's ability to take profits out of one country to support competitive attacks in another  the geographic distance of the firm from franchisees can make it difficult to detect poor quality Companies like McDonald’s can use franchising to quickly establish a global presence without incurring significant cost or risk.

14-21 Why Choose Joint Ventures?  Joint ventures are attractive because  firms benefit from a local partner's knowledge of local conditions, culture, language, political systems, and business systems  the costs and risks of opening a foreign market are shared  they satisfy political considerations for market entry  Joint ventures are unattractive because  the firm risks giving control of its technology to its partner  the firm may not have the tight control to realize experience curve or location economies  shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

14-22 Why Choose A Wholly Owned Subsidiary?  Wholly owned subsidiaries are attractive because  they reduce the risk of losing control over core competencies  they give a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination  they may be required in order to realize location and experience curve economies  Wholly owned subsidiaries are unattractive because  the firm bears the full cost and risk of setting up overseas operations

14-23 Which Entry Mode Is Best? Advantages and Disadvantages of Entry Modes

Summary of the lecture  Several factors affect the choice of entry mode including  transport costs; trade barriers; political risks; economic risks Costs; firm strategy  The choice of foreign markets will depend on their long run profit potential  Favorable markets: are politically stable; have free market systems; have relatively low inflation rates ; have low private sector debt  Less desirable markets: are politically unstable ; have mixed or command economies; have excessive levels of borrowing  Markets are also more attractive when the product in question is not widely available and satisfies an unmet need  Timing of Entry: Entry is early when the firm enters a foreign market before other foreign firms--Entry is late when the firm enters the market after firms have already established themselves in the market

 First mover advantages: the ability to pre-empt rivals by establishing a strong brand name; the ability to build up sales volume and ride down the experience curve; the ability to create  After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field  Firms that enter a market on a significant scale make a strategic commitment to the market - the decision has a long term impact and is difficult to reverse  These are six different ways to enter a foreign market